In this era of liberalization and globalization, the ideal step for development of business is an opportunity for expansion and Franchising has proved to be one of the best model for speedier expansion and development of business worldwide. This model of business expansion provides a scope to grow as a brand name with the help of efficacious business operators.
Franchising creates a contractual relationship between the Franchisor and the Franchisee vide Franchise Agreement (hereinafter referred to as “the Agreement”) which contains terms and conditions to be followed throughout the duration of Franchise business and contains obligation that shall be followed post-termination of the contract.
Further, the drafting and the negotiation of the contract shall be made in a meticulous manner to avoid enormous litigious risks, since due to the absence of a particular legislation governing Franchising in India, various legal issues arise during the Franchising. These issues may arise in various aspects like Intellectual Property, Unfair Trade Practices, Taxation, etc.
COMPREHENDING THE CONCEPTS
A Franchise is a type of license granted to the independent business operators or the Franchisee by the owner of a trade name or trademark or Franchisor to sell the services or a product under the name of the trademark of the Franchisor.
The relationship between the Franchisee and Franchisor is contractual in nature. The Franchisor permits the Franchisee to conduct the business under his name, in exchange for royalty fees. The business of the Franchisor is required to be developed in a format that shall be recognized with its brand name.
To own a Franchise, initially, the Franchisee is required to make a capital investment and get equipped with the working system of the Franchisor’s business. The goodwill and the brand name shall be associated with the working operations of the Franchisee. Hence, the Franchisor provides supervision and support in various aspects of the business.
Royalty fee and franchising fee are paid, based on the income, to the Franchisor by the Franchisee, in exchange for the license to conduct business under its trade name.
Types of Franchising Agreements
Earlier, the sole purpose of the Franchise Agreement was either to promote a product or a business format. Therefore, the concept of Product franchising was introduced in which the Franchisee used to concentrate on a manufacturer’s single product, and thereby acquiring the manufacturer’s identity to some extent.
However, post 1950’s a new dawn of Franchising, was introduced known as Business Format franchising, wherein the Franchisee has to follow strict guidelines and operational standards on product development and marketing.
In order for better understanding, let us go through few usual types of Franchising Agreements.
- Invention Licensing Agreement: Under this kind of an Agreement wherein a person has created a new invention and seeks to maximize the fruits of his invention, by firstly patenting the invention and thereafter exploiting it on a nationwide or worldwide platform.
- Trademark Licensing Agreement: Under this kind of an Agreement the owner of a trademark in order to build brand equity can grant a license to another person to use the trademark on goods, which are associated with that particular
- Character Merchandising Agreement: Under this kind of an Agreement, the name of a famous entertainment or sports personality or probably a fictional or graphical character is licensed to be used on certain products.
- Dealer/Distributor/Marketing Arrangements: This is the kind of an Agreement, wherein the dealers or distributors adopt a particular business system or format of the Franchisor. Generally, these Agreements are entered in cases of dealerships with automobile companies, food and consumer goods chains, petrol pumps, gas stations etc.
ANALYSING THE OPPORTUNITIES AND OBSTACLES
It is quintessential to comprehend that the several factors administer the success of Franchising. Today, brand names are the major players in the market due to the consistent consumer confidence and trust entrusted with them.
Franchising has proven to be one of the most profitable business models for Domestic and International businesses. Through Franchising, the Franchisor enlarges the scope of his business and makes his business accessible to people in different areas of the country or globe.
Since the Franchisee has control over the business operations, the manpower resources and problems branching from the labor conflicts are dealt with by the Franchisee and not by the Franchisor. However, it is an arduous task to find a prudent Franchisee as the goodwill of the Franchise is dependent on the acts of the Franchisee. If the Franchisee fails to adhere to the basic standard of service of the Franchisor’s business, it shall directly lead to cessation of relationship based on trust and quality of the service.
Whilst analyzing the opportunities and obstacles of Franchising, it is paramount to comprehend the Franchisee’s viewpoint, since the Franchisee has to invest an initial capital for using the business system of the Franchisor. However, it is an opportunity to capitalize and benefit from the well-established business system of the Franchisor, as the the Franchisee benefits from the advertising, marketing of the trade name, the bulk purchasing power of the Franchisor.
Moreover, the Franchisor provides assistance, support and supervision throughout the period of Franchising. However, sometimes the imposition of policies, supervision and control has turned out to be an embargo on the Franchisee profitability.
Franchising is a business model wherein the independent business operators takes license from the Franchisor or the owner of a trade name or trademark to sell the services or a product under the name of its trademark in exchange for royalty fees. The relationship between the Franchisee and Franchisor is purely contractual in nature.
Growth has been constant since the wave of capitalization has hit the world. Hence, franchising is considered to become an ideal step for the development of business organizations worldwide.
In this blog we attempt to discuss the concept of franchising by comprehending the understanding of the type of business, status and role of the Franchisor and Franchisee in business along with the opportunities and obstacles that arise during the course of business.
The complex aspects of the Franchise Agreement, structure of the Franchise Agreement, duties of Franchisor and Franchisee, Legal Issues and Safeguards required will be meticulously discussed in upcoming parts. Stay tuned!
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